On 1st April 2015 important changes are being introduced to the VAT treatment of prompt payment discounts (PPD) including how these should be shown on VAT invoices and accounted for. There will be changes for both suppliers and customers who issue or receive VAT invoices with a PPD.
charges and accounts for VAT on the discounted amount.
The customer also treats the discounted rate as input tax (whether the discount is taken or not).
New Rules as of 1st April 2015When a PPD is offered the supplier must account for VAT on the actual amount received.
How to complyCredit notes will need to be issued if the VAT differs from that on the original invoice or alternatively invoices must contain the terms of the PPD and a statement that 'the customer may only treat as input tax the amount of VAT actually paid'.
What do HMRC recommend?HMRC recommend that tax invoices are issued showing net/VAT/gross amounts for both payment terms (with and without any PPD). View an example invoice here.
The full HMRC brief can be viewed here on the HMRC website.
Insights Insight...Our view is that this is an ill-conceived change implemented without any thought to the practical problems it creates.
We're not aware of any accounting software that can easily implement the HMRC 'recommended solution' of showing both options on invoices.
Confusions are sure to arise with receipt, payment and processing amounts being unclear.